Pension Tax Allowances and Defined Benefit Transfers: 2026 Guide

The Lifetime Allowance no longer applies: it was abolished from 6 April 2024. In its place, the Lump Sum Allowance (£268,275) limits most people's tax-free cash, and the Lump Sum and Death Benefit Allowance (£1,073,100) limits tax-free lump sums including certain death benefits. Before any defined benefit transfer, it is worth understanding how these allowances, any old protections you hold, and the inheritance tax changes due in April 2027 apply to you.

Why pension tax allowances matter for DB transfers

Pension tax allowances are an important part of the picture for anyone thinking about a defined benefit (DB) pension transfer. The rules changed significantly when the Lifetime Allowance (LTA) was abolished in April 2024, and it helps to understand what replaced it.

This guide explains the pension tax allowances that apply in 2026, how they interact with defined benefit transfers, and what to think about before any decision.

Important: This article is general information, not financial advice. Pension transfers are complex and cannot be reversed. If your safeguarded benefits are worth more than £30,000, you must take regulated advice from an FCA-authorised adviser with the pension transfer permission before you can transfer.

The end of the Lifetime Allowance: what changed in April 2024?

Until 5 April 2024, the Lifetime Allowance (LTA) was the total value of pension benefits you could build up across all your pensions before extra tax charges applied. It had been £1,073,100 since the 2020/21 tax year and was then frozen. Back in 2011/12 it had been as high as £1.8 million.

The LTA tax charge (55% on lump sums and 25% on other benefits above the allowance) was removed from 6 April 2023, and the LTA itself was abolished from 6 April 2024. That did not mean unlimited tax-free cash. Two new allowances took its place, and they are now the key figures to understand. You can read HMRC's summary on gov.uk.

The two new allowances

The LTA was replaced by two allowances that focus on tax-free lump sums:

Lump Sum Allowance (LSA): £268,275

The LSA is the most tax-free cash most people can receive from all their pensions combined over their lifetime. It covers the tax-free part of lump sums such as the pension commencement lump sum (PCLS) and the tax-free element of uncrystallised funds pension lump sums. Lump sums above this limit are taxed as income at your marginal rate.

The figure is 25% of the old standard LTA of £1,073,100.

Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100

The LSDBA is a wider limit covering tax-free lump sums taken in your lifetime plus certain tax-free lump sums paid on your death. It matters if you have large pensions and are thinking about what happens to them when you die.

These allowances apply across all your pensions combined, both defined benefit and defined contribution.

How pension allowances affect defined benefit transfers

How the allowances interact with a transfer is one of the most important, and most misunderstood, parts of the picture.

Tax-free cash under the current rules

If you stay in a defined benefit scheme, you will usually receive a tax-free lump sum at retirement, either built into the scheme's benefits or by giving up (commuting) some of your pension income in exchange. That tax-free cash counts towards your Lump Sum Allowance of £268,275.

If you transfer to a defined contribution (DC) pension, you can generally take up to 25% of the fund as tax-free cash, subject to your remaining LSA. For a pension pot of around £1 million, 25% would be £250,000, using up almost all of the £268,275 allowance.

The tax-free cash from a DB scheme can be more or less than 25% of the transfer value, depending on the scheme's commutation terms. Some schemes also have protected tax-free cash above 25%, which may be lost on a transfer. Ask the scheme for the figures in writing.

For people with large pensions, particularly cash equivalent transfer values (CETVs) above £1 million, the tax-free cash effects of a transfer need careful analysis.

Transitional tax-free amount certificates

If you took tax-free cash before 6 April 2024, the amount you have already used is usually worked out using a standard calculation. In some cases you can apply for a transitional tax-free amount certificate, which records what you actually took and can leave you with more of your allowances remaining than the standard calculation would.

If you took pension benefits before April 2024, it may be worth looking at whether a certificate would help. Once one is issued it cannot be cancelled, so it is an area where regulated advice is worthwhile.

Key point: Unlike the old LTA rules, there is no longer a tax charge simply for having a large pension. The new allowances only limit the tax-free lump sums. Income from a pension continues to be taxed at your marginal rate, as it always was.

LTA protections: do they still matter?

While the LTA existed, HMRC offered several types of protection for people whose pensions were close to or above it as it was reduced over the years. These included:

• Enhanced protection, introduced in 2006 for people who stopped building up pension savings.
• Primary protection, for people with pensions worth more than £1.5 million on 5 April 2006.
• Fixed protection (2012, 2014 and 2016), which protected a higher LTA from those dates.
• Individual protection (2014 and 2016), based on the value of your pensions on a set date.

With the LTA gone, many people assume these protections no longer matter. In practice they can. If you held a valid protection on 5 April 2024, you may have a higher personal Lump Sum Allowance than £268,275, depending on the type.

If you hold any form of LTA protection, take regulated advice before:

• Paying more into a pension.
• Transferring a defined benefit pension.
• Combining pensions.

Some protections can still be lost through certain actions, which could have a significant effect on your tax-free cash.

The 2027 inheritance tax changes

Unused pension funds and most death benefits are due to come into the scope of inheritance tax (IHT) from 6 April 2027. At the moment, pension funds usually sit outside your estate for inheritance tax, which has made them a popular way to pass on wealth.

This matters for defined benefit transfer decisions because:

• DC pensions have offered a lot of flexibility on death, with funds able to pass to beneficiaries.
• DB pensions usually pay a spouse's or dependant's pension rather than a lump sum to beneficiaries.
• Once unused pension funds come into the scope of inheritance tax, much of the estate planning advantage people have seen in DC pensions shrinks.

Anyone weighing up a DB transfer partly for estate planning reasons should keep the 2027 changes firmly in mind, and check the detail against the final legislation and HMRC guidance with a regulated adviser.

Read more: The 2027 pension IHT overhaul: what you need to know

Annual Allowance: the other key limit

The Annual Allowance, which caps how much can be paid into pensions each tax year with tax relief, is still in place. For 2026/27 it is £60,000, and tax relief on your own contributions is also limited to 100% of your UK earnings.

For defined benefit members, the Annual Allowance is tested using the "pension input amount", which measures how much your DB benefits have grown in the tax year.

After a transfer, the Annual Allowance matters if you plan to keep paying into a defined contribution pension. For high earners, the tapered Annual Allowance can reduce the £60,000 limit, to a minimum of £10,000 for people with adjusted income above £360,000.

If you have taken taxable income flexibly from a defined contribution pension, the Money Purchase Annual Allowance (MPAA) of £10,000 usually applies, which significantly limits future DC contributions. Check current figures on gov.uk.

Putting it all together

When thinking about a defined benefit transfer in 2026, the pension tax allowances to consider include:

Allowance	Current limit	Relevance to DB transfers
Lump Sum Allowance (LSA)	£268,275	Caps tax-free cash from all pensions; a transfer can change how much you take
Lump Sum and Death Benefit Allowance (LSDBA)	£1,073,100	Relevant to estate planning; certain death benefit lump sums count towards it
Annual Allowance	£60,000	Limits future contributions; the MPAA of £10,000 applies after flexible access
LTA protections (if held)	Varies	May give a higher personal LSA; some can be lost through certain actions

Learn more about DB transfers

Tax allowances are only one part of the defined benefit transfer picture. You may also want to read about the factors that affect DB transfer values, our main defined benefit pension guide, and what happens to your benefits if your employer goes bust.

Getting advice

Pension tax allowances have changed significantly since April 2024, and the effect on a defined benefit transfer can be complex. Your remaining LSA, any LTA protections, your other pensions and your personal goals all need to be looked at together.

The FCA's starting assumption is that a transfer is unlikely to be suitable for most people. If your safeguarded benefits are worth more than £30,000, the law requires you to take regulated advice from an FCA-authorised adviser whose firm holds the pension transfer permission. The advice must be given or checked by a qualified pension transfer specialist. This requirement exists because these decisions cannot be undone.

For free, impartial guidance, contact MoneyHelper. Be wary of anyone who contacts you out of the blue about your pension, and check the FCA ScamSmart site before dealing with any firm.

If you would like to understand how DB transfers and the advice process work, you can book a free chat about how the process works. It is general information, not advice.

Frequently asked questions

What replaced the Lifetime Allowance after April 2024?

The Lifetime Allowance was abolished from 6 April 2024. It was replaced by the Lump Sum Allowance (LSA) of £268,275, which caps the tax-free cash most people can take from their pensions over their lifetime, and the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100, which covers tax-free lump sums in your lifetime and certain lump sums paid on death. Both apply across all your pensions combined.

How does transferring a defined benefit pension affect my tax-free cash?

If you transfer to a defined contribution pension, your tax-free cash is generally 25% of the fund, subject to your remaining Lump Sum Allowance of £268,275. That may be more or less than the scheme would have paid, and any protected tax-free cash could be lost. For very large CETVs, a transfer could use all or most of your LSA. Take regulated advice before any decision.

Do LTA protections still matter after the Lifetime Allowance was abolished?

Yes. If you held a valid LTA protection on 5 April 2024, you may have a higher personal Lump Sum Allowance than £268,275, depending on the type of protection. Some protections can still be lost through certain actions, so take advice before making pension decisions if you hold one.

What is the Annual Allowance and does it affect DB pension transfers?

The Annual Allowance is £60,000 for 2026/27 and limits how much can be paid into pensions each year with tax relief. It does not affect the transfer itself, but it matters if you plan to keep paying into a defined contribution pension afterwards. If you have already taken taxable income flexibly, the Money Purchase Annual Allowance of £10,000 usually applies instead.

How will the 2027 inheritance tax changes affect defined benefit transfer decisions?

Unused pension funds and most death benefits are due to come into the scope of inheritance tax from 6 April 2027. Until now, DC pension funds could often be passed on outside the estate, which has been an attraction for some people considering a DB transfer for estate planning reasons. The changes are likely to reduce that advantage, so anyone considering a transfer partly for estate planning should factor them in and check the detail against the final rules.

This article is general information, not financial advice. Tax rules depend on your circumstances and can change.